nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒08‒21
twenty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation expectations, disagreement, and monetary policy By Hoffmann, Mathias; Hürtgen, Patrick
  2. Optimal Macroprudential and Monetary Policy in a Currency Union By Dmitriy Sergeyev
  3. Negative Interest Rate Policies: Sources and Implications By Carlos Arteta; M. Ayhan Kose; Marc Stocker; Temel Taskin
  4. A Portfolio Model of Quantitative Easing By Christensen, Jens H. E.; Krogstrup, Signe
  5. Velocity in the Long Run: Money and Structural Transformation By Antonio Mele; Radoslaw Stefanski
  6. Velocity in the Long Run: Money and Structural Transformation By Antonio Mele; Radoslaw Stefanski
  7. The Risk-Adjusted Monetary Policy Rule By Nakata, Taisuke; Schmidt, Sebastian
  8. Price-Setting and Exchange Rate Pass-Through in the Mexican Economy: Evidence from CPI Micro Data By Kochen Federico; Sámano Daniel
  9. Interest on Reserves, Interbank Lending, and Monetary Policy By Stephen Williamson
  10. Cross-border Spillover Effects of Unconventional Monetary Policies on Swiss Asset Prices By Severin Bernhard; Till Ebner
  11. Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Systemic Risk? By Carlson, Mark A.; Wheelock, David C.
  12. Can monetary policy drive economic growth? empirical evidence from Tanzania By Nyorekwa, Enock Twinoburyo; Odhiambo, Nicholas Mbaya
  13. An empirical assessment of exchange arrangements and inflation performance By Cruz-Rodríguez, Alexis
  14. Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation By Marc Dordal-i-Carreras; Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland
  15. Analysis of the balance between U.S. monetary and fiscal policy using simulated wavelet-based optimal tracking control By Crowley, Patrick M.; Hudgins, David
  16. Dissemination of Information by the Federal Reserve System: An Overview and Benchmark By Araujo, Luiz Nelson
  17. Monetary economics from econophysics perspective By Victor M. Yakovenko
  18. Exhange rate linkages between the Asean currencies, the US dollar and the Chinese RMB By Caporale, Guglielmo Maria; Gil-Alana, Luis A.; You, Kefei
  19. The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation By Emi Nakamura; Jón Steinsson; Patrick Sun; Daniel Villar
  20. Coordination in Price Setting and the Zero Lower Bound: A Global Games Approach By Mitsuru Katagiri
  21. The Case for Flexible Exchange Rates in a Great Recession By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
  22. anticipated banking panics By andrea prestipino; Nobuhiro Kiyotaki; Mark Gertler

  1. By: Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: Survey data on inflation expectations show that: (i) private sector forecasts and central bank forecasts are not fully aligned and (ii) private sector forecasters disagree about inflation expectations. To reconcile these two facts we introduce dispersed information in a New Keynesian model, where as a result, inflation expectations differ between the private sector and the central bank. We show that output and inflation responses change markedly when the central bank responds to private sector inflation expectations rather than to their own.
    Keywords: business cycles,survey data,learning,disagreement,monetary policy
    JEL: E52 E31 D83
    Date: 2016
  2. By: Dmitriy Sergeyev (Bocconi University)
    Abstract: I solve for optimal macroprudential and monetary policies for members of a currency union in an open economy model with nominal price rigidities, demand for safe as- sets, and collateral constraints. Monetary policy is conducted by a single central bank, which sets a common interest rate. Macroprudential policy is set at a country level through the choice of reserve requirements. I emphasize two main results. First, with asymmetric countries and sticky prices, the optimal macroprudential policy has a country-specific stabilization role beyond optimal regulation of financial sectors. This result holds even if optimal fiscal transfers are allowed among the union members. Second, there is a role for global coordination of country-specific macroprudential policies. This is true even when countries have no monopoly power over prices of internationally traded goods or assets. These results build the case for coordinated macroprudential policies that go beyond achieving financial stability objectives.
    Date: 2016
  3. By: Carlos Arteta (Development Prospects Group, World Bank); M. Ayhan Kose (Development Prospects Group, World Bank; Brookings Institution; CEPR; CAMA); Marc Stocker (Development Prospects Group, World Bank); Temel Taskin (Development Prospects Group, World Bank)
    Abstract: Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years. This paper studies the sources and implications of NIRP. We report four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy maker’s toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks.
    Keywords: Unconventional monetary policy, quantitative easing; bank profitability, financial stability, negative yields, event study, emerging markets, developing countries.
    JEL: E52 E58 E60
    Date: 2016–09
  4. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Krogstrup, Signe (Swiss National Bank)
    Abstract: This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, commonly known as quantitative easing (QE). Two financial frictions—segmentation of the market for central bank reserves and imperfect asset substitutability—give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.
    JEL: E43 E50 E52 E58 G11
    Date: 2016–07–21
  5. By: Antonio Mele (University of Surrey); Radoslaw Stefanski (University of St Andrews)
    Abstract: Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not `always and everywhere a monetary phenomenon': the composition of output influences money demand and hence the secular trends of price levels.
    Keywords: structural transformation, monetary shares, velocity, agricultural productivity, nonmonetary exchange 1 We would like to thank Martin Ellison, Alexander Berentsen, Fernando Martin, Domenico Ferraro, B
    JEL: O1 O4 E4 E5 N1
    Date: 2016–07–28
  6. By: Antonio Mele (University of Surrey); Radoslaw Stefanski (University of St Andrews)
    Abstract: Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not `always and everywhere a monetary phenomenon': the composition of output influences money demand and hence the secular trends of price levels.
    Keywords: structural transformation, monetary shares, velocity, agricultural productivity, nonmonetary exchange 1 We would like to thank Martin Ellison, Alexander Berentsen, Fernando Martin, Domenico Ferraro, B
    JEL: O1 O4 E4 E5 N1
    Date: 2016–07–28
  7. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation---the rate to which inflation will eventually converge---which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted policy rule, the intercept of the rule is modified so that the RSS of inflation equals the inflation-target parameter in the policy rule.
    Keywords: Effective Lower Bound ; Inflation Targeting ; Monetary Policy Rule ; Risk ; Risky Steady State
    JEL: E32 E52
    Date: 2016–07
  8. By: Kochen Federico; Sámano Daniel
    Abstract: As a consequence of the international environment, the currencies of many emerging market economies have experienced important depreciations in a context of high volatility in financial markets. The Mexican peso has not been the exception to the above situation. In this setting, the exchange rate pass-through into consumer prices deserves special attention as it allows us to evaluate the anchoring of inflation expectations in the Mexican economy. To address this issue, in this paper we use non-public micro data from the Mexican Consumer Price Index (CPI) to analyze the relation between exchange rate and price-setting in Mexico for the period between January 2011 and April 2016. Our estimates suggest that the exchange rate pass-through into consumer prices is low.
    Keywords: Exchange Rate Pass-Through;Price Micro Data;Nominal Stickiness
    JEL: E31 F31 F41
    Date: 2016–08
  9. By: Stephen Williamson (Federal Reserve Bank of St. Louis)
    Abstract: A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates "balance sheet costs" of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank's balance sheet. Increases in the central bank's balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt.
    Date: 2016
  10. By: Severin Bernhard; Till Ebner
    Abstract: Unconventional monetary policies (UMPs) by the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan exert important spillover effects on asset prices in Switzerland if market anticipation of UMP announcements is properly accounted for. Using a broad event set and a long-term bond futures-based measure as a proxy for market anticipation of the announcements, we show that the unexpected part of those UMPs boost Swiss government and corporate bond prices, induce the CHF to appreciate, and dampen Swiss equity prices. Four extensions provide additional insights: First, the estimated effects are strongest for announcements by the ECB. Second, the impact on government bonds is largest for bonds with residual maturities of 7-10 years. Third, the impact of foreign UMP shocks on exchange rates and Swiss bond yields is less pronounced after the introduction of the EURCHF-floor by the Swiss National Bank on September 6, 2011. Fourth, the sign of spillover effects differs for positive and negative UMP surprises, but their strength does not. Our results hint at an important role played by both international portfolio re-balancing channels and international signalling channels in the transmission of foreign monetary policy shocks to Swiss asset prices.
    JEL: E52 E58 E65 F31 F42 G12
    Date: 2016
  11. By: Carlson, Mark A.; Wheelock, David C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the 19th century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank market and correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed’s establishment affected the system’s resilience to solvency and liquidity shocks and whether these shocks might have been contagious. We find that the interbank system became more resilient to solvency shocks but less resilient to liquidity shocks as banks sharply reduced their liquidity after the Fed’s founding. The industry’s response illustrates how the introduction of a lender of last resort can alter private behavior in a way that increases the likelihood that the lender will be needed.
    Keywords: Federal Reserve System; Contagion; Systemic risk; Seasonal liquidity demand; Interbank networks; Banking panics; National Banking system
    JEL: E42 E44 E58 G21 N11 N12 N21 N22
    Date: 2016–07–18
  12. By: Nyorekwa, Enock Twinoburyo; Odhiambo, Nicholas Mbaya
    Abstract: The role of monetary policy in promoting economic growth remains empirically an open research question. This paper attempts to bridge the knowledge gap by investigating the impact of monetary policy on economic growth in Tanzania during the period from 1975 to 2013 ??? using the autoregressive distributed lag (ARDL) bounds-testing approach. The study uses two proxies of monetary policy, namely, money supply and interest rate, to examine this linkage. The empirical results of this study confirm the existence of long-run monetary policy neutrality ??? irrespective of the proxy used to measure monetary policy. However, the short-run results only confirm the existence of monetary policy neutrality ??? but only when the interest rate is used as a proxy for monetary policy. When money supply is used to measure monetary policy, a negative relationship between monetary policy and economic growth is found to predominate
    Keywords: Monetary Policy, Economic Growth, Interest Rate, Money Supply
    Date: 2016–08
  13. By: Cruz-Rodríguez, Alexis
    Abstract: This article provides empirical support for the hypothesis that different exchange rate regimes have an impact on inflation in advanced, emerging and developing countries. The effects of different exchange rate regimes on inflation performance are examined through least squares dummy variables regressions using panel data on 125 countries for the post-Bretton Woods (1974-1999). Also, this article addresses the issue of measurement errors in the classification of exchange rate regimes by using four different classification schemes. Three de facto and one de jure classifications are used. Consequently, the sensitivity of these results to alternative exchange rate classifications is also tested. The empirical findings indicate that countries with fixed regimes tend to have a lower inflation rate compared to floating and intermediate exchange rate regimes, particularly in emerging and developing countries.
    Keywords: Exchange rate regimes, inflation
    JEL: E31 F31 F33
    Date: 2016–07–28
  14. By: Marc Dordal-i-Carreras; Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland
    Abstract: Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. We introduce a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.
    JEL: E3 E4 E5
    Date: 2016–08
  15. By: Crowley, Patrick M.; Hudgins, David
    Abstract: This paper uses wavelet-based optimal control to simulate fiscal and monetary strategies under different levels of policy restrictions. The model applies the Maximal Overlap Discrete Wavelet Transform (MODWT) to United States quarterly GDP data, and then uses the decomposed variables to build a large 80 dimensional state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy is restricted to achieving a steady increase in the market interest rate, and (3) only monetary policy is relatively active, while fiscal spending is restricted to achieving a target growth rate. The results show that fiscal policy must be more aggressive when the monetary authorities are not accommodating the fiscal expansion, and that the dual-emphasis policy leads a series of interest rate increases that are balanced between a steadily increasing target and a low, fixed rate. This research is the first to construct integrated fiscal and monetary policies in an applied wavelet-based optimal control setting using U.S. data.
    Keywords: fiscal policy, linear-quadratic, monetary policy, optimal tracking control, discrete wavelet analysis
    JEL: C49 C61 C63 C88 E58 E61
    Date: 2016–08–04
  16. By: Araujo, Luiz Nelson
    Abstract: This paper examines the Federal Reserve System’s dissemination of information strategy to see how well it has worked and how it can be improved. The System provides information to a broad spectrum of individuals and organizations. The evidence collected, for the first time, shows a high level of discrepancy in relation to the use of social media channels to disseminate information among Banks in the Federal Reserve System. Overall, the Federal Reserve System adopts and makes available to stakeholders the same platforms for the dissemination of information. They use the same general structure of alternatives, but with significant differences in accessibility, availability, and quality. There are many options to improve the current offerings in these three attributes when one takes into account not only the best practice within the System but also that adopt by central banks in other jurisdictions, and even organizations in the private sector.
    Keywords: Federal Reserve System, Federal Reserve Banks, Fed, Central Bank Communication, Central Bank Dissemination of Information, Social Media Channels
    JEL: E58 E59
    Date: 2016–08–15
  17. By: Victor M. Yakovenko
    Abstract: This is an invited article for the Discussion and Debate special issue of The European Physical Journal Special Topics on the subject "Can Economics Be a Physical Science?" The first part of the paper traces the personal path of the author from theoretical physics to economics. It briefly summarizes applications of statistical physics to monetary transactions in an ensemble of economic agents. It shows how a highly unequal probability distribution of money emerges due to irreversible increase of entropy in the system. The second part examines deep conceptual and controversial issues and fallacies in monetary economics from econophysics perspective. These issues include the nature of money, conservation (or not) of money, distinctions between money vs. wealth and money vs. debt, creation of money by the state and debt by the banks, the origins of monetary crises and capitalist profit. Presentation uses plain language understandable to laypeople and may be of interest to both specialists and general public.
    Date: 2016–08
  18. By: Caporale, Guglielmo Maria; Gil-Alana, Luis A.; You, Kefei
    Abstract: This paper investigates whether the RMB is in the process of replacing the US dollar as the anchor currency in nine ASEAN countries, and also the linkages between the ASEAN currencies and a regional currency unit. A long-memory (fractional integration) model allowing for endogenously determined structural breaks is estimated for these purposes (Gil-Alana, 2008). The results suggest that the ASEAN currencies are much more interlinked than previously thought, whether or not breaks are taken into account, which provides support for a regional currency index as an anchor. Moreover, incorporating a break shows that the linkages between these currencies and the RMB and the US dollar respectively are equally important, and in fact in recent years the former have become stronger than the latter. Therefore including the RMB in the regional index should be considered.
    Keywords: ASEAN currencies, Chinese RMB, US dollar peg, fractional integration, breaks
    JEL: F31 C22
    Date: 2016–08–01
  19. By: Emi Nakamura; Jón Steinsson; Patrick Sun; Daniel Villar
    Abstract: A key policy question is: How high an inflation rate should central banks target? This depends crucially on the costs of inflation. An important concern is that high inflation will lead to inefficient price dispersion. Workhorse New Keynesian models imply that this cost of inflation is very large. An increase in steady state inflation from 0% to 10% yields a welfare loss that is an order of magnitude greater than the welfare loss from business cycle fluctuations in output in these models. We assess this prediction empirically using a new dataset on price behavior during the Great Inflation of the late 1970's and early 1980's in the United States. If price dispersion increases rapidly with inflation, we should see the absolute size of price changes increasing with inflation: price changes should become larger as prices drift further from their optimal level at higher inflation rates. We find no evidence that the absolute size of price changes rose during the Great Inflation. This suggests that the standard New Keynesian analysis of the welfare costs of inflation is wrong and its implications for the optimal inflation rate need to be reassessed. We also find that (non-sale) prices have not become more flexible over the past 40 years.
    JEL: E31 E50
    Date: 2016–08
  20. By: Mitsuru Katagiri (Bank of Japan)
    Abstract: Abstract: In this paper, I construct a two-period general equilibrium model and describe price competition among monopolistically competitive firms as a coordination game. While the model has multiple equilibria with different levels of inflation (positive or zero), the equilibrium selection in line with global games implies that the economy with a high natural interest rate, i.e., high expected productivity growth, tends to move into the equilibrium with positive inflation. The policy analyses indicate that monetary policy measures such as an increase in the target inflation rate and a decrease in the lower bound of nominal interest rates can prevent the economy from moving into the zero inflation equilibrium even in the face of low expected productivity growth.
    Keywords: Inflation Indeterminacy; Effective Lower Bound; Global Games
    JEL: D82 E31 E52
    Date: 2016–08–08
  21. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
    Abstract: We analyze macroeconomic stabilization in a small open economy which faces a large recession in the rest of the world. We show that for the economy to remain isolated from the shock, the exchange rate must depreciate not only to offset the collapse in external demand, but also to decouple domestic prices from deflation in the rest of the world. If monetary policy becomes constrained by the zero lower bound, the scope of exchange rate depreciation is limited. Still, in this case there is a ``benign coincidence'': fiscal policy is particularly effective in stabilizing economic activity. Under fixed exchange rates, instead, the impact of the external shock is particularly severe and the effectiveness of fiscal policy reduced.
    Keywords: Benign coincidence; Exchange rate; external shock; External-demand multiplier; Fiscal Multiplier; great recession; zero lower bound
    JEL: E31 F41 F42
    Date: 2016–08
  22. By: andrea prestipino (Federal Reserve Board); Nobuhiro Kiyotaki (Princeton University); Mark Gertler (New York University)
    Abstract: In the Great Recession, a gradual weakening of the banking system induced a kind of slow run on shadow banks that culminated in an overall collapse following the Lehmann Brothers bankruptcy. We develop a macroeconomic model with banking and bank runs that captures this slow run behavior and the transition to fast runs. In the model, a weakening of banks' balance sheets leads agents to rationally increase their assessment of the probability of a run and hence to withdraw funds from the financial system. These slow runs have harmful effects on the economy and set the stage for fast runs.
    Date: 2016

This nep-mon issue is ©2016 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.